Question Details

Which of the following is most likely to occur as you add randomly 


1.	Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio?

a.	Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.
b.	Adding more such stocks will increase the portfolio's expected rate of return.
c.	Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk.
d.	Adding more such stocks will have no effect on the portfolio's risk.
e.	Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk.
	
2.	Bob has a $50,000 stock portfolio with a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%.  Becky also has a $50,000 portfolio, but it has a beta of 0.8, an expected return of 9.2%, and a standard deviation that is also 25%.  The correlation coefficient, r, between Bob's and Becky's portfolios is zero.  If Bob and Becky marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?

a.	The combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
b.	The combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%.
c.	The combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.
d.	The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations, 25%.
e.	The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations, 25%.
	
3.	Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y.  Both stocks have an expected return of 15%, betas of 1.6, and standard deviations of 30%.  The returns of the two stocks are independent, so the correlation coefficient between them, rXY, is zero.  Which of the following statements best describes the characteristics of your 2-stock portfolio?

a.	Your portfolio has a standard deviation of 30%, and its expected return is 15%.
b.	Your portfolio has a standard deviation less than 30%, and its beta is greater than 1.6.
c.	Your portfolio has a beta equal to 1.6, and its expected return is 15%.
d.	Your portfolio has a beta greater than 1.6, and its expected return is greater than 15%.
e.	Your portfolio has a standard deviation greater than 30% and a beta equal to 1.6.
	
4.	Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

a.	The diversifiable risk of your portfolio will likely decline, but the expected market risk should not change.
b.	The expected return of your portfolio is likely to decline.
c.	The diversifiable risk will remain the same, but the market risk will likely decline.
d.	Both the diversifiable risk and the market risk of your portfolio are likely to decline.
e.	The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.
	
5.	Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2 average stocks.  Assuming the market is in equilibrium, which of the following statements is CORRECT?

a.	Jane's portfolio will have less diversifiable risk and also less market risk than Dick's portfolio.
b.	The required return on Jane's portfolio will be lower than that on Dick's portfolio because Jane's portfolio will have less total risk.
c.	Dick's portfolio will have more diversifiable risk, the same market risk, and thus more total risk than Jane's portfolio, but the required (and expected) returns will be the same on both portfolios.
d.	If the two portfolios have the same beta, their required returns will be the same, but Jane's portfolio will have less market risk than Dick's.
e.	The expected return on Jane's portfolio must be lower than the expected return on Dick's portfolio because Jane is more diversified.




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